Financial Rules for Stay-at-Home Spouses

The "Mommy Wars" and related skirmishes have been waged for decades, with no distinct winners.

What is clear is that there are several important laws and financial rules for stay-at-home spouses. Enmeshed in complicated government regulations, many homemakers are not aware of how their no-paycheck status impacts what's in their wallet today and their future financial security.

"They just don't know their rights," says Amy Matsui, senior counsel with the National Women's Law Center.

Here are some of the financial rules for stay-at-home spouses, defined as someone working on the home front but not drawing a paycheck.

Getting a Credit Card

If you want to keep your personal spending separate, you can't do it with your own credit card. One of the consequences of the Credit Card Accountability, Responsibility and Disclosure Act, or CARD Act, of 2009, which aimed to bar issuers from supplying college students with credit by requiring that cards be issued only to those with income to pay the bills, was to also restrict homemakers who don't earn income on their own from getting their own card.

One CARD Act provision that went into effect Oct. 1, 2011, made it impossible for nonworking spouses without their own source of income to get a new credit card. It meant that a homemaker could only get a card through his or her spouse as an authorized user on a joint card.

These financial rules for stay-at-home spouses sparked the ire of many like Holly McCall, who partnered with the nonprofit group MomsRising to petition for signatures on its website and on Change.org to ask the federal Consumer Financial Protection Bureau to amend the law for nonearning homemakers.

In October 2012, the CFPB proposed changes to the new regulations to make it easier for spouses or partners who do not work outside of the home to qualify for credit cards. The bureau's proposed revision would allow credit card applicants who are age 21 or older to rely on third-party income to which they have a reasonable expectation of access.

Protecting 401(k) Funds

You rely on these retirement funds coming from your working spouse, but you could get a nasty surprise. A 401(k) account is often the biggest asset that couples have. To protect that important source of retirement savings, federal law requires a worker to get his or her spouse's signature if he or she wants to name someone else as the beneficiary of the account.

But if someone with a 401(k) changes jobs, that person can cash out the 401(k) without getting a spouse's permission. The person also can roll the funds into an individual retirement account and name someone else as the beneficiary, Matsui says.

"IRAs are a huge problem," she says. When someone sets up an IRA, there is no requirement that the spouse of the account holder be named as beneficiary or even that the spouse consents to the designation of other beneficiaries.

"In some cases, after a spouse has died, the surviving partner has tried to challenge the other named beneficiary receiving the IRA, Matsui says. But spouses have no rights to the IRA except in a handful of states with community property laws when others, such as children from a prior marriage, have been designated as the IRA beneficiaries, she says.

Putting Money away for Retirement

You may not earn a paycheck, but you can put money away for retirement in your own name.

"It drives me nuts that so many women don't know that they could set up an IRA in their own name," says Cindy Hounsell, president of the nonprofit Women's Institute for a Secure Retirement in Washington, D.C.

IRAs became available decades ago to help workers build tax-advantaged retirement savings, and so-called spousal IRAs are intended to provide homemakers who may not earn any outside income to be able to create their own personal IRAs, just like paycheck-earning workers.

As with other IRAs, in 2013 homemakers can contribute up to $5,500 annually -- $6,500 if the homemaker is over age 50 -- and the contributions can be deducted from the couple's adjusted gross income, with some restrictions.

It's critically important for nonworking spouses to have funds in their own names, Hounsell says. "No one thinks they are going to get divorced." But when it happens, many former spouses discover they have no access to retirement funds or that they have inadequate retirement funds.

Maximizing Social Security

Homemakers who don't earn an income for a prolonged period and then divorce will probably suffer in retirement because their own Social Security payout would be based on their interrupted and presumably low earnings history.

If you divorce after you reach your 10th anniversary, you'll have a richer retirement. Social Security rules dictate that if a prior marriage lasted at least 10 years, the divorced spouse is entitled to a benefit of 50% of the ex's benefits.

For instance, if a man files for Social Security at age 66 and receives a $2,000 benefit, his former wife could get $1,000 as long as the couple saw a 10th wedding anniversary. Divorced widows also are eligible to collect the spousal benefit if they were married 10 years, says Jim Blair, a former Social Security administrator who co-runs Premier Social Security Consulting.

"If you are married nine years and 11 months, you would get nothing," Blair says.

Filing Tax Returns

If your spouse cheats on income taxes, you may not be liable if you prove your innocence. A homemaker who earns no income does not have to file his or her own separate income tax return but usually elects to file a joint return with the paycheck-earning spouse, says Paul Kohlhoff, law professor and supervising faculty attorney of the tax clinic at Valparaiso University Law School in Indiana.

The fact that a nonearning spouse jointly files will probably enhance the chances of getting "innocent spouse" relief in cases where the Internal Revenue Service is collecting on a fraudulent return, so long as the nonearning spouse was not aware of the fraud, Kohlhoff says.

The IRS originally came up with an "innocent spouse" rule to provide relief to a spouse who files jointly but was compelled by duress or lack of knowledge to sign off on a return that understated income or underpaid the amount owed, Kohlhoff says.

It's easier for nonworking spouses to be granted this relief since the IRS could argue "there was tacit consent," if a working partner signed a joint return when she or he could file separately, Kohlhoff says.

Usually, a spouse is divorced or separated when he or she asks for relief from having to pay the amount owed. The IRS recently liberalized the rules, eliminating a two-year deadline from the time of the first collection for petitioning for relief. Still, nonworking spouses must prove that they were under physical or emotional duress or ignorant of the tax cheating to be granted this relief, Kohlhoff says.